Planners have long called on the FCA to take a firmer stance on dubious ‘advisers’, but who is responsible for reporting suitability failings?
Scathing comments from the FCA over advisers’ unwillingness to call out peers who are guilty of poor practice are continuing to cause frustration within the financial planning community.
A speech from the regulator’s co-director of life insurance and financial advice supervision Debbie Gupta at the Money Marketing Interactive conference on 4 April suggested advisers should be more active in reporting bad behaviour. Without advisers speaking up, the industry will continue to struggle to agree on a single definition for good and bad conduct, she said. This has received plenty of backlash in the past fortnight, with advisers pointing out multiple recent occurrences where the regulator has relied on adviser intelligence to pursue rogue IFAs.
This includes helping to close in on schemes that have had devastating consequences for consumers, which have added to public mistrust in the financial advice industry.
Most notably, such incidents have included the collapse of the British Steel Pension Scheme, the discretionary fund manager Beaufort Securities and the Connaught Income Fund.
Money Marketing has looked at the FCA’s mixed statistics on whistleblowing to see how many cases are followed up after advisers flag them, asking what role the profession should play in weeding out its own bad apples.
Separating the statistics
A range of Freedom of Information Act requests from last year show different figures, but suggest that few whistleblowing reports lead to action.
In one FOI Act request, the FCA said that at 12 November 2018, a total of 1,000 whistleblowing disclosures had been received by its dedicated office that calendar year. Responding to a separate FOI Act request from earlier in 2018, the watchdog said 2,107 whistleblowing reports has been received in the previous 24 months. Of these, 40 instigated investigations.
Some 909 of the reports received in those 24 months across 2016 and 2017 were flagged as requiring no further action.
In 2017, the FCA introduced a new case management system which it said allowed for the expansion of the range of allegations recorded about financial planning firms.
The system breaks down reports into categories which include bribery and corruption, compliance, consumer detriment, crime, organisational culture, data
security, fitness and propriety, fraud, and insider dealing.
With the new categories in place, it is difficult to determine how many reports there are now in comparison to previous years from available FOI Act requests. That includes how many are actioned.
There are also the whistleblowing reports that were, or may be, of value to the FCA, but are not currently actionable or do not meet current regulatory risk thresholds for investigation.
Additionally, certain reports require no further action because they are deemed to be “of little value and are unlikely to assist the FCA in the discharge of its functions”.
When it comes to advisers, drawing the line between simply controversial practice and provable malpractice is a key determiner in how action is taken.
Informed Choice Independent Financial Planners managing director Martin Bamford says advisers may often choose to report cases through their professional bodies, rather than deal with the FCA.
He says: “Advisers can go direct to the FCA or to Action Fraud, or maybe a local police force if fraud or something similar is happening in one area.
“Advisers do also report others to their professional body where they are doing things that are not consistent with the industry’s ethics, however.”
The Chartered Institute for Securities and Investment tells Money Marketing that it has never gone on to file a whistleblowing report it has received with the FCA.
There is a specific team at the body for those wishing to flag ethical concerns, which follows a four-step procedure to determine whether the issue is taken forward.
A spokeswoman says: “Our ethics team can signpost further guidance and support that members may find necessary to help them through the process of reporting another [member].
“We have also developed a suite of resources to support financial services organisations in embedding this culture, providing knowledge to organisations and confidence to individuals.”
London Institute of Banking and Finance director of business development Mark Heaton says the body mostly receives anonymous tip-offs.
He adds: “The total number of cases amounts to a handful each year [and] we investigate thoroughly to establish the facts and to take appropriate action when needed.
“We work closely with the FCA and have reported to it where we’ve found instances, for example, of IFAs not meeting continuing professional development requirements, through to situations where we discover one of our regulated members has been convicted of a financial crime.”
Managing director, Informed Choice Independent Financial Planners
It is outrageous for the FCA to say advisers do not do enough whistleblowing.
There is a huge amount going on and I see it all the time in a variety of ways, but people are taking issues of bad practice to the regulator and they don’t always get the best response.
When we do whistleblow, we never know what the outcome is and sometimes it’s years before communications are published. That is very disheartening when we’ve gone to the trouble of flagging it up. Far more damage is done to our collective reputation if we are leaving bad practice unchecked. We need more transparency from the regulator on what it does with the information.
Whistleblowing in action
Extraordinary efforts from conscientious advisers limited the damage for scores of people who were encouraged to transfer out of the BSPS in 2017. But Gupta highlighted the BSPS fallout as a particular example of where advisers could have done more to help and been more direct in their communication with the watchdog.
First Actuarial director Henry Tapper says this claim is far from the truth.
Tapper has been heavily involved with Operation Chive, the pro bono adviser-led initiative which has provided guidance to affected steelworkers.
He says: “BSPS is a classic example of where the FCA has taken the credit for whistleblowing that was done by IFAs.
“Advisers had to do that whistleblowing in the first place because the FCA didn’t have sufficient resources to act on what was coming at them.
“I feel angry for IFAs who have been whistleblowing because the FCA is now in a position where it is being critical when its own affairs are not in order.
“Advisers are caught between a rock and a hard place because whistleblowing is a lot of risk.”
Advisers are justified in feeling hard done by if they take that risk and it does not appear to be tangibly worth it, he adds.
“They haven’t even seen the fruits of their labour, which is the FCA getting stuck in to its work, and we see this again and again.
“There’s a fundamental lack of empathy going on from those who are in authority.
“Situations like BSPS will happen again because when we see a situation like that brewing and go to the FCA, nothing will be done about it. Whistleblowing is only one small department.”
In the case of collapsed DFM Beaufort Securities, the FCA is now the party in the firing line. Complaints Commissioner Antony Townsend called for the disclosure of the watchdog’s files on the DFM’s collapse last December.
This followed a final report into an unrelated, partially upheld case that revealed an adviser first questioned the FCA on its awareness of allegations against Beaufort back in 2016. Of the findings, Townsend says: “I have not had access to relevant internal files to assess what action the FCA took in relation to Beaufort and on what timescale.
“Its complaints team should have investigated the issues raised fully, even if some confidential matters could not be shared.”
Director, Moerae Life Financial Planning
For many firms, the relationship between the FCA and themselves has been irretrievably broken as a result of the increased FOS limits and the problems with professional indemnity insurance.
Rushed through, how can we ever trust a consultation paper again? It does not help though when the FCA keeps focusing on inputs and hoping that the outputs take care of themselves – a concept not accepted by anyone else.
The FCA must ensure a form of self-regulating quality standard which monitors outputs to ensure consumers are looked after. The FCA as a regulator needs to drive this and it would get the support of responsible and concerned firms that share the same ideals.
As of 12 April, 1,400 Beaufort investors were still waiting for refunds from the Financial Services Compensation Scheme, which partially blamed its new – and predominantly adviser-funded – £69m levy on having to pay them out.
The remaining redress payments to investors who lost money after the 2012 collapse of the Connaught Income Fund were finalised in February.
Administrators Duff & Phelps spoke with Money Marketing about the delayed process on a number of occasions in 2018.
The FCA’s concerns over interest payments caused the longest delay last June, while it sought specialist tax advice from a third party.
Tapper says the events show the regulator’s infrastructure is lacking, while advisers’ attempts to provide information also face too many delays in the bottleneck of the regulator’s procedures.
He says: “The FCA has never been resourced properly to follow up whistleblowing leads, and whether it’s through the watchdog or through Action Fraud, the vast majority of the tipping off has been done by IFAs and it’s come to nothing.”
Despite the severity of the Connaught fallout, advisers say the regulator sat on information from whistleblowers for more than two years.
An adviser, who does not want to be named, says: “The Connaught whistleblowers were hung out to dry by the FCA, which then held back the information, allowing advisers to continue recommending the product when they knew it was dodgy. Our feeling as advisers is that somebody at the FCA or even at the Financial Ombudsman Service should be held accountable.
“Until they put their own house in order, there will never be confidence in the system they have created.”
Wingate Financial Planning planner Alistair Cunningham says the most significant problem is that advisers continue to feel out of the circle. He adds: “Where I see examples of bad practice, I will flag them with the FCA but while I have it on good authority that everything has been passed on and dealt with, we do lose the control and transparency over such things.
“We never know what happens after that reporting, except in extreme situations like BSPS.”
Head to head
Whistleblowing isn’t common enough
Co-director of life insurance and financial advice supervision, FCA
The culture of calling out bad practice and of whistleblowing is not yet commonplace and advisers don’t always come to us when they see it happening. We want this industry to be professional, with strong codes of conduct, alongside a principle of “do no harm” and deeply ingrained ethics that we all work towards.
We all need to get to a collective place where we know what good looks like in the industry and what bad looks like.
Most importantly, we need to put the public at the centre of that.
Poor practice in the industry damages all of us. It’s damaging for the reputation of advisers and it’s damaging for the regulator, not just the individual who is doing it.
My views on the current state of the industry are not as sunny and optimistic as they might be in the future.
I do not want mistrust to be how the FCA frames the relationship we have with advisers because we need a common understanding on both sides that we are, in fact, on the same side.
The FCA needs to help whistleblowers more
Chief executive, Pimfa
The regulator must recognise that the industry does not currently have confidence that it actively monitors intelligence and takes appropriate action.
There are a number of actions the FCA could consider, such as appointing a senior member of staff to be responsible for intelligence gathering whose remit includes engagement with the industry; improving its website so that there is a portal for regulated firms to easily report information; providing a direct telephone number staffed by suitably trained staff rather than going through the contact centre; providing a clear explanation of the process it follows when presented with intelligence; and giving generic details in its annual report on the intelligence received during the year and the types of action taken.
The industry wants to help the FCA but it must have confidence that the regulator acts on the information it receives.
Finding common ground
Gupta’s calls for the regulator’s relationship with advisers not to be “framed by mistrust” moving forward have also been criticised in recent weeks, as have her calls for better collaboration.
A commentator on Money Marketing’s story about Gupta’s speech says they have alerted the FCA to multiple instances of suspect practice, particularly those perpetrated by third-party firms and introducers.
They say: “On not one of those occasions did the FCA consider my call worthwhile. I spoke to somebody self-evidently at the most junior level who had no understanding of either the issues I was reporting, nor of their seriousness.
“I had no confidence that the issues I raised would be investigated.”
Harvest Independent Financial Management owner Julian Stevens says advisers may soon lose patience waiting for transparent communication.
He adds: “How many times have we read reports from advisers who did their civic duty by informing the FCA of downright criminal activities, only for the FCA to not do anything? There is a widespread feeling of ‘why should we bother?’”
Cunningham says situations with the magnitude of the BSPS fallout are not always accurate textbook references of the regulator’s behaviour.
He says: “They are in a difficult position because they can’t always give feedback on what they are doing in case it might prejudice future cases, and some advisers need to just rely on the trust that the information they give is encouraging, and that their views are being acted upon.
“I think speaking up could worry some advisers, and I can imagine some are put off by the thought it may reflect badly on us all.
“I do take what the FCA says in good faith, however.”
The continuous cycle of investigations into poor practice within the industry is emblematic of wider failings, some add.
The FCA’s slow progress on tightening phoenixing rules will always play into wider concerns about industry supervision.
Purely Financial adviser Peter Cranwell says: “The practice of advisers previously found to be flouting the law simply closing down and then re-emerging under a different name is our professional shame. That blame lies squarely at the feet of the regulator.”
Cunningham concludes that advisers should not be discouraged from whistleblowing, as poor communication with the FCA may lead to a reputational and financial fallout. He says: “What damages the industry most is when these bad firms or advisers go under and leave massive liabilities, which are then picked up by the FSCS.
“Indirectly, advisers pick up the tab for everything.”
The FCA’s rules on whistleblowing
- Appoint a senior manager as their whistleblowers’ champion;
- Put in place internal whistleblowing arrangements able to handle all types of disclosure from all types of person;
- Put text in settlement agreements explaining that workers have a legal right to blow the whistle;
- Tell UK-based employees about the FCA and Prudential Regulation Authority whistleblowing services;
- Present a report on whistleblowing to the board at least annually;
- Inform the FCA if they lose an employment tribunal with a whistleblower;
- Require appointed representatives and tied agents (where applicable) to tell UK employees about the FCA whistleblowing service.